On New Year’s Eve 2019, China informed the World Health Organization of cases of pneumonia of unknown cause in the city of Wuhan. Less than 90 days later, novel coronavirus, a virus that causes a disease known as COVID-19 and that produced the illnesses, had become a pandemic infecting nearly 300,000 people in 187 countries and killing almost 13,000. It brought the economies of several countries, including the United States, to a virtual standstill as residents were encouraged or ordered to stay away from each other.
The effects on insurance agencies, as key players in the U.S. economy, are significant and potentially long-lasting. It is influencing their prospects for selling their agencies, their revenues, their operations, and their relationships with their clients.
Anxious clients are swamping agencies with desperate phone calls, wanting to know if they have any insurance coverage for the financial losses the virus is inflicting on them. While the pandemic may implicate multiple lines of insurance coverage, business interruption has been the primary concern of many. Businesses in the travel and hospitality industries have suffered unprecedented losses.
Unfortunately, few if any business income policies provide coverage for these losses. These policies usually do not provide coverage unless the insured has suffered damage to or loss of covered property caused by a covered cause of loss. They typically exclude coverage for losses caused by viruses or bacteria capable of causing physical distress. As a consequence, agencies are dealing with upset and anxious clients.
Many agencies, either voluntarily or in response to government edicts, are for the first time having employees work from home. This can be challenging for both supervisors and employees. A recent Harvard Business Review article recommends:
- Daily calls between managers and remote employees
- Using video conferencing, instant messaging, and other alternative communications tools
- Setting expectations for when, how, and how often communications will occur
- Providing opportunities for remote non-work interaction
- Offering encouragement and emotional support
Cybersecurity is particularly important with a remote workforce. Experts advise requiring employees to:
- Update passwords
- Use the agency’s virtual private network (VPN)
- Use multi-factor authentication, such as a code sent to an employee’s phone
- Make computers used for work off-limits to their children
Agency commission revenues are likely to decline in tandem with premiums, many of which are calculated based on an insured business’s payroll or sales. Dan Menzer of mergers and acquisitions consulting firm Optis Partners expects revenues to stumble as return premium audits start to arrive.
For agencies in the M&A process, the pandemic’s timing may seem especially bad. However, Jon Persky of consulting firm Optimum Performance Solutions says this is still a good time to buy or sell an agency. His firm is still presenting agencies for sale and finding interested buyers.
Marc Greene of General Insurance Brokerage sees a stable M&A marketplace and a potentially favorable lending environment. He notes proposals in Congress to hike the U.S. Small Business Administration’s lending authority and waive the guarantee fee for a one-year period.
Conversely, Menzer expects many potential buyers to take a “wait and see what happens” approach. “No one likes the unknown,” he says, “so until there’s a little more certainty to what’s going to happen, I think we’ll see some modest cooling off.” He also expects private lenders to restrict lending capacity a bit.
Restrictions on in-person gatherings present a hurdle, though Persky sees it as surmountable. “A lot of due diligence can be done remotely,” he says. His firm has deals in process now that he expects to close after the buyers and sellers meet in person and buyers can meet agency staff. Greene does not expect the inability to meet face to face to significantly slow the market.
The big unknowns are the length and severity of the crisis. “If this period of uncertainty and inability to contain and control the disease continues with no viable solutions,” Menzer says, “it will tighten the reins on M&A and everything else.” The impacts could be more short-lived if we get signs of stability soon.
The COVID-19 outbreak is the most severe viral outbreak since World War I. Insurance agencies are likely to feel its effects for years to come.